Inverse Floater

Definition of 'Inverse Floater'


A bond or other type of debt whose coupon rate has an inverse relationship to a benchmark rate. An inverse floater adjusts its coupon payment as the interest rate changes. When the interest rate goes up the coupon payment rate will go down because the interest rate is deducted from the coupon payment. A higher interest rate means more is deducted, thus less is paid to the holder. A ratio of the interest rate can also be used instead of one to one relationship. Also known as an inverse floating rate note.

Investopedia explains 'Inverse Floater'


You would want to invest in an inverse floater if the benchmark rate is high and you think the rate will decrease in the future at a faster rate than the forwards show. With an inverse floater, as interest rates fall, the coupon rate rises because less is taken off.

One more strategy is to buy an interest rate floater if the rates are low now and you expect them to stay low, but the forwards are implying an increase. If you were correct and the rates do not change, you will outperform the floating rate note by purchasing the inverse floating rate note.


Filed Under: ,

comments powered by Disqus
Hot Definitions
  1. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.
  2. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction.
  4. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious debt when government leaders use borrowed funds in ways that don't benefit or even oppress citizens. Some legal scholars argue that successor governments should not be held accountable for odious debt incurred by earlier regimes, but there is no consensus on how odious debt should actually be treated.
  5. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares.
  6. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by additional investment would not warrant the expense. A harvest strategy is employed when a line of business is considered to be a cash cow, meaning that the brand is mature and is unlikely to grow if more investment is added.
Trading Center